Rates to fall in Feb: Index

Rates to fall in Feb: Index

Consumer confidence is at its lowest level since August, which could encourage the Reserve Bank to review its current stance on rates in February.

According to the latest Westpac Melbourne Institute Index, consumer sentiment fell by 8.3 per cent in De

by webmaster

December 23, 2011

The Reserve Bank will be encouraged to cut rates on the back of the lowest consumer confidence since August cember from 103.4 in November to 94.7 in December.

“On face value it should be a surprise that the Index has not risen following a second rate cut from the Reserve Bank (which was eventually passed on in full by the major banks to mortgage borrowers). However the history of previous easing cycles shows that rate cuts do not guarantee an improvement in sentiment,” Westpac's chief economist Bill Evans said.

“Since 1994 we have seen 20 rate cuts including December’s. On 12 occasions the Index has increased following the rate cut and on 8 occasions it has fallen. The likely explanation is that respondents' concerns over the reasons behind the rate cut may overwhelm the perceived benefits of the cut itself.

“For this survey we also ask respondents questions about those news items which they most recall and whether these items are perceived positively or negatively. When interest rates are moving they typically capture considerable attention. For this survey news on interest rates was recalled by 31.5 per cent of respondents whereas economic conditions attracted the attention of 60 per cent; international conditions 55.6 per cent and Budget and taxation 36.9 per cent.

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“The news on economic conditions; international conditions and Budget and taxation was considered the most negative since 2008/09. News on interest rates was the most positive since that period.

Despite the positive perception of interest rates, Mr Evans said the confidence of respondents with a mortgage fell by 9.5 per cent.

“Specific news which is likely to have unnerved respondents is the reported increase in the unemployment rate from 5.2 per cent to 5.3 per cent with a loss of 40,000 full time jobs. Of course, the constant stream of news on developments in Europe is also likely to have impacted respondents, while equity markets were volatile,” he said.

“Four of the five components of the Index fell in December. The sub-index tracking views on "economic conditions over the next 12 months" was down by 19.4 per cent; while "economic conditions over the next 5 years" fell by 14.4 per cent; "family finances compared to a year ago" fell by 8.6 per cent although “expectations for family finances over the next 12 months” improved by 3 per cent.”

With sentiment still down and falling, Mr Evans said it is now very likely that the Reserve Bank would look to cut rates again at its February board meeting.